Tag: bonds

A quick note on bonds

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We compared the total returns from the short-end of the curve to Nifty. Here’s what we found:

  1. IRR over the last 10 years for bonds was 6.53%.
  2. Biggest drawdown was -5.04%.
  3. Only two years of negative correlation with NIFTY.

Annual returns:
nifty.vs.0-5.bonds

Equity curve:
0-5's vs. NIFTY returns

Drawdowns:
0-5s.NIFTY.drawdowns

The right place for bonds in a portfolio is for regular income. From a returns perspective, you are better off investing in equities. Bonds are no less volatile when compared to the returns they give, and are mostly correlated with equity volatility.

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Are we setup up for a bond rally?

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ICICI came out with an interesting note on why they expects Indian bonds to rally. They outline 5 factors:

  1. Improving current account balance
  2. Falling inflation
  3. Fiscal consolidation
  4. Rising savings rate
  5. Substantial FII inflows

Related: Long-term Gilt Funds, where we layout the same thesis.


 
 
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He is an AMFI registered IFA who can advice you on IDBI, Mirae, HDFC, ICICI Pru, UTI and Birla Sun Life funds.
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Why Diversify?

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One of the main benefits of diversification is that if you invest in a group of assets with low correlations to one another, then you are likely to get the highest return for a given level of risk. But has it really worked that way for Indian investors? Here’s what we found while we crunched some numbers using CNX 100 and GSec 8+ year total return index since 2003.

Correlation

Yes, correlations are low: 0.0624. And we have a scatter-plot to prove it:

CNX 100-GSEC_SUB_8-2003

Returns

Here’s how the yearly returns look like (%):

stocks.vs.bond.returns

An 80:20 stocks:bonds portfolio would have had an average return of 21.43% vs 25.81% of a stock-only portfolio – a give up of 4.38% in returns – with lower volatility.

The question is, is it worth the trade off if you can stomach the volatility?

Related: BOND ≠ BORING

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Bonds, Rates and USDINR Update

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The Yield Curve

Lets put the current zero-coupon yield curve in context.

Jan 2011 vs. Now

yieldCurve.2011-01-18.2014-07-25

Jan 2012 vs. Now

yieldCurve.2012-01-02.2014-07-25

Jan 2013 vs. Now

yieldCurve.2013-01-01.2014-07-25

Indian 10 yrs vs. US

After the initial Modi euphoria, the spread between Indian 10 yrs and US 10 yrs started to revert back to its mean:

ust-ind-10yr-spread.2011-01-18

Total Return Indices

Investors in the long bond are yet to recover from the July 2013 draw-down but this year is looking good. Long-bond might just be the place to be as the RBI is widely expected to get into easing mode later this year/early next year.

Cumulative Returns Since 2000

Short
short bond total return

Intermediate
intermediate bond total return

Long
long bond total return

Cumulative Returns Since 2010

Short
short bond returns since 2010

Intermediate
intermediate bond returns since 2010

Long
long bond returns since 2010

Bond ≠ Boring

Returns have been volatile for bond investors.

gsec monthly returns

Can’t really sell “stability” here.

USDINR

A new normal past the euphoria and the hangover?

USDINR.2013

USDINR.2010

In closing

With inflation somewhat stabilizing and the NDA-II government wanting to kick start growth, bonds are getting interesting again. And when rates start moving, currencies cannot be far behind.

Stay updated on the latest news related to Indian interest rates here. Its curated.

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